In July 2001 President
Bush signed into law a $1.35 trillion tax cut that
reduced marginal tax rates across the board. The President said that
the tax
cuts would help boost the economy, which was in recession at the time.
The
concept of income elasticity of demand is useful in understanding
how
consumer spending on specific goods and services is affected by an
increase
in disposable income. An increase in disposable income will result
in an
increase in the quantity of normal and luxury goods and services purchased.
If indeed consumers respond to the increase in disposable income by
increasing their spending on goods and services, the tax cut will
have a
stimulative effect on the macroeconomy.